Carbon Trading System

“Our freedoms, our comforts, our prosperity are all the products of fossil fuel, whose combustion is also responsible for climate change. Ours are the most fortunate generations that have ever lived. Ours might also be the most fortunate generations that ever will. We inhabit the brief historical interlude between ecological constraint and ecological catastrophe”

- George Monbiot, author of the book In Heat: How to Stop the Planet Burning

On 9 May 1992, governments around the world adopted the UN Framework Convention on Climate Change, that can be truly called the first step towards a challengeable and complex environmental problem of global warming. Five years later, on 11 December 1997, governments took a next step and adopted the Kyoto Protocol. Based on the framework of the Convention, the Kyoto Protocol is aimed to decrease the level of greenhouse gas emissions by means of the new innovative approach in addressing the problem of carbon dioxide and tackle the serious threat of climate change. This paper will look further into the carbon trading system and examine the opportunity for providing the long-term competitive advantage to European industry by identifying and confronting the key determinants and core benefits of this emission trading systems and providing some real life examples.

The scheme was launched on 1 January 2005, involving 25 Member states. The first phase that will deal with the reduction of CO2 emissions by means of carbon trading system will last from 2005-2007 and, eventually the second phase will run from 2008-2012 to coincide with the first Kyoto Commitment Period.( European Commission, 2004)

In order to fully understand the impacts and the working of carbon trading system, just as the net benefits, it is important to investigate the cause of greenhouse gases, its impact on the environment and climate change.

Two authors and top scientists Thomas Karl, director of NOAA’s National Climatic Data Center, and Kevin Trenberth- head of the Climate Analysis Section at the National Center for Atmospheric Research state in their study about the climate change: “There is no doubt that the composition of the atmosphere is changing because of human activities, and today greenhouse gases are the largest human influence on global climate,”(Karl, Trenberth, 2003). They continue that “between 1990 and 2100, there is a 90 percent probability that global temperatures will rise by 1.7 to 4.9 degrees Celsius (3.1 to 8.9 degrees Fahrenheit), because of human influences on climate”.(NCAR, 2003) Nowadays, scientists are able to establish a relationships between the concentration of carbon dioxide in the atmosphere and its effect on global warming and eventually climate change. In this context it is worth to notice that developed countries producing 45 percent of all emissions of carbon dioxide (CO2), the main greenhouse gas causing global warming effect. In fact, as argued in the IPCC :“There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities” (IPCC Third Assessment Report. Summary for Policymakers, 2001). The rapid tempo of industrialization and continuously rising demand for the energy sources resulted in increasing concentration of greenhouse gases in the atmosphere. The data presented by UN commission showed an increase of 2.4% in CO2 emissions across 41 industrialized countries between 2000 and 2004.(BBC news, 2006) The outcome of increasing CO2 emissions, as warned by Stern report, could lead to the severe consequences among others radical climate change threatening human life and changes in the ecosystem. Therefore, addressing the urgent need of greenhouse gas reduction the EU has set up the new innovative approach to battle the biggest industrial polluters and encourage investment in the new technology towards the low-carbon economy.

The concept behind the system is developed on so called “ cap and trade” basis. However, the concept is not new: earlier system was introduced in 1990s by US government with the purpose to reduce the air pollution caused by sulfur dioxide (SO2).This scheme appeared to be a success and entailed emission reduction by nearly 50%. In addition, “this was achieved at much lower costs than had been anticipated: original estimates of permit prices in the first phase of the programme had ranged between US$181 and US$981, but actual prices have hovered around US$150 and have rarely been in excess of the lower band of estimates”(Observer, 2002) Furthermore, other effective projects involving tradable permits allowed to reduce lead in gasoline and other pollutants, such as oxides of nitrogen.(Haddad, 2000). As mentioned previously, the first phase of ETS will be directed to target CO2 emissions only, mainly by targeting large polluters such as the power and heat generation industry and some of the energy-intensive industrial sectors such as oil refineries, paper, ceramics, steel and iron factories. (Economist, 2004). According to the EU report carbon trading system is based around the trading of emission allowances. One allowance represents the right to produce one tonne of CO2. Member States have been allocated national plans enabling individual companies to produce a free of charge limited amount of CO2 which must comply with the certain amount of allowances, which are in scarcity. Companies that produce below the appointed allowances and have an excess of the allowances are able to sell them to the companies who want to produce more or are exceeding their limits. As much could be said in the support of this system, one will look at the most obvious benefits of the allowances adoption.

Looking from the environmental point of view, companies will be forced to either reduce their emissions by means of investing in more environment friendly technology, switch to the less carbon-intensive energy source to stay within the permitted level of allowances, buy the extra allowances they need at the market rate, which is regulated by supply and demand, or a combination of the two. The companies that will produce more CO2 then they are allowed to will be penalized: “a penalty of 40 euros (52 dollars) for every excess tonne of CO2 for 2007 (and also for 2006), a punishment that will rise to 100 euros (130 dollars) a tonne from 2008”. (Angleys, 2007).Consequently, the defenders of carbon trading system advocate that carbon trading will give incentive towards the clean-up of the carbon dioxide emissions and encourage companies to find more innovative solutions such as investing in the environment friendly technology or switching to the alternative source of energy. According to “Porter hypothesis”